Global central banks can adopt negative rates as conventional tool

Thursday, 5 April 2018 00:00 -     - {{hitsCtrl.values.hits}}

BEIJING/HONG KONG (Reuters): Global central banks should adopt deeply negative interest rate policy during a ‘deflationary’ recession and use it as a conventional monetary tool to revitalise growth, a senior Chinese central bank official wrote in a working paper.

Because the natural rate of interest rates in advanced economies may stay low in the long run, central banks are likely to resort to negative rate policy more often in the future, Sun Guofeng, head of the financial research bureau at the People’s Bank of China (PBOC), wrote in the central bank paper.

“If banks are willing to expose retail depositors to negative interest rates, the effectiveness of the negative interest rate policy will be greatly strengthened, and central banks should adopt deeply negative interest rates during a deflationary recession,” Sun said.

While the PBOC hasn’t resorted to negative rates, a period of ultra-low rates has been the norm globally going back a decade since the financial crisis sparked a deep worldwide recession. Many central banks, including the Bank of Japan and the European Central Bank, adopted negative rates to combat deflation and low growth.

Sun’s comments mark the first time a policy maker from a major central bank has proposed that negative interest rates should be used as a conventional monetary policy tool to fight recessions.

“If the interest rate pass-through to deposit markets is complete, the negative interest rate policy (becomes) very effective in boosting credit growth and inflation,” Sun said.

Furthermore, central banks should promote digital currency to strengthen the effectiveness of negative interest rate policies, he added, contending that it will eventually solve the problem of higher costs of holding paper currency compared with costs of bank deposits.